RGA 2014 Q3 Form 10-Q Summary
Business context and reporting period
Reinsurance Group of America, Incorporated is a global life and health reinsurer with businesses in traditional mortality and morbidity reinsurance, longevity, disability, critical illness, annuity, financial reinsurance and synthetic guaranteed investment contracts. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, with comparisons to the same periods in 2013. Effective January 1, 2014, the company realigned certain geographic operations and renamed its segments; prior-period amounts were conformed to the new presentation.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Total revenues | $2.717 billion | $2.390 billion | $8.207 billion | $7.582 billion |
| Net premiums | $2.168 billion | $2.026 billion | $6.452 billion | $6.041 billion |
| Income before taxes | $231.8 million | $201.7 million | $731.8 million | $405.8 million |
| Net income | $158.0 million | $138.0 million | $493.0 million | $273.9 million |
| Diluted EPS | $2.28 | $1.93 | $7.03 | $3.76 |
| Dividends declared per share | $0.33 | $0.30 | $0.93 | $0.78 |
- Revenue increased 13.7% in the quarter and 8.2% year to date. Net premiums increased 7.0% and 6.8%, respectively.
- Net income increased 14.5% in the quarter and 80.0% year to date. Pretax margins were approximately 8.5% in the quarter and 8.9% year to date; net margins were approximately 5.8% and 6.0%, respectively.
- Net cash provided by operating activities was $1.238 billion for the first nine months, compared with $1.251 billion in 2013. Cash and cash equivalents ended at $1.119 billion, up from $924 million at December 31, 2013.
- Total assets were $42.910 billion and stockholders’ equity was $6.680 billion at September 30, 2014, compared with $39.674 billion and $5.936 billion, respectively, at year-end 2013.
- Total investments were $35.521 billion, including $24.475 billion of available-for-sale fixed maturity securities. Approximately 94.5% of fixed maturity securities were investment grade.
- Long-term debt was $2.315 billion and the collateral finance facility was $482.1 million. Management reported compliance with all debt covenants. The company had no cash borrowings under its $850 million revolving credit facility and had $672.2 million of revolving availability.
Material changes versus the prior comparable period
- Quarterly pretax income increased $30.1 million, primarily from higher net premiums, higher investment income and favorable investment-related gains.
- Year-to-date pretax income increased $326.0 million. The principal comparison benefit was the $274.1 million increase in Australian group claims liabilities recognized in 2013, together with improved Asia Pacific results in 2014.
- Investment-related gains were $22.3 million in Q3 2014 versus a $76.5 million loss in Q3 2013, and $225.4 million year to date versus $66.1 million in 2013. Results benefited from tighter credit spreads and derivative valuation changes.
- Traditional U.S. and Latin America pretax income declined 8.5% in the quarter and 12.6% year to date due largely to elevated mortality claims. Canada pretax income declined 40.2% in the quarter and 29.6% year to date because of unfavorable individual life mortality and foreign exchange effects.
- Europe, Middle East and Africa pretax income increased 13.9% in the quarter and 94.5% year to date, reflecting increased business volumes, favorable claims experience and investment gains.
- Asia Pacific generated $81.7 million of year-to-date pretax income versus a $250.3 million loss in 2013, primarily because of the prior-year Australian disability claims charge and a 2014 recapture fee.
- The company repurchased $201.0 million of common stock during the first nine months, including $20.9 million in the third quarter. Approximately $102.3 million remained under the authorization at September 30, 2014.
Guidance, outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance was provided. Management stated that liquidity and capital were adequate for current operating levels and expected cash resources to cover the next 12 months, including potential early recaptures and higher-than-expected claims.
- Management expects continued growth opportunities from industry consolidation and the established practice of reinsuring mortality risks, although growth may be slower than historical levels in some markets.
- Low interest rates remain a pressure on investment yields. The nine-month investment yield excluding spread-related business was 4.78%, unchanged from 2013; management noted that continued low rates could pressure future yields.
- Derivative and embedded-derivative fair-value changes materially affected earnings but generally do not affect current cash flows, policyholder crediting rates or underlying spread performance. These valuations are sensitive to interest rates, credit spreads, equity markets, implied volatility and policyholder behavior.
- Variable-annuity living-benefit liabilities had a fair value of $106 million at September 30, 2014, compared with $30 million at December 31, 2013. Hedging may not fully offset adverse market movements, volatility, interest-rate changes or unexpected policyholder behavior.
- Key risks include mortality, morbidity, longevity, lapsation, treaty recapture, investment impairment, interest-rate and currency movements, counterparty and retrocessionaire failures, collateral availability, regulatory changes affecting captives and statutory reserves, liquidity, credit ratings, litigation, catastrophes and operational or information-technology failures.
- Undrawn letters of credit totaled approximately $195.4 million for third parties and $1.216 billion primarily supporting affiliated reinsurance. Treaty guarantees totaled $852 million before consideration of assets in trust.
- On October 21, 2014, RGA announced an agreement to acquire Aurora National Life Assurance Company, with approximately 82,000 policies and $2.7 billion of statutory policyholder liabilities. Closing was expected in early 2015 subject to regulatory approval.
- The filing reported no material litigation and no material changes to previously disclosed risk factors. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Separate recurring underwriting performance from volatile, non-cash derivative and embedded-derivative valuation gains.
- Assess whether elevated U.S. and Canadian mortality claims persist and whether Asia Pacific improvement is sustainable after the 2013 comparison effects and 2014 recapture fee.
- Monitor investment yield compression, credit spreads, unrealized losses, impairments and the concentration of funds withheld at interest, including the $4.3 billion associated with one client.
- Review debt maturities, covenant requirements, credit-rating triggers, letters of credit and collateral requirements, particularly as statutory reserve needs increase.
- Evaluate the capital, liquidity, regulatory approval and integration implications of the planned Aurora acquisition.
- Reconcile GAAP earnings with segment results and management’s “before certain derivatives” measures, which are non-GAAP analytical presentations rather than substitutes for GAAP results.